How do you think about multiple expansion vs. contraction?
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Never underwrite multiple expansion in your base case — it's a gift, not a strategy. Multiple expansion happens when: business quality improves (recurring revenue, diversification), scale increases (larger businesses trade at higher multiples), or market conditions improve. Multiple contraction risk: if you buy at 12x in a hot market and exit in a recession at 8x, you need massive EBITDA growth just to break even on equity.
WHAT INTERVIEWERS LISTEN FOR
- ✓Never underwrite multiple expansion
- ✓Multiple expansion is a gift
- ✓Business quality drives multiple expansion
- ✓Scale increases multiples
- ✓Multiple contraction risk in recession
COMMON MISTAKES
- ✗Assuming multiple expansion in base case
- ✗Ignoring market cycle impact on multiples
- ✗Not accounting for multiple contraction risk
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